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Employers use commissions and bonuses to reward and retain their employees. However, when designing these incentive plans employers often don’t consider the impact they have on an employee’s overall compensation and the employer’s potential liability if wages, particularly overtime earnings, are not paid correctly.

The Fair Labor Standards Act (FLSA) and California wage and hour wage and hour law require employers to factor into the payment of overtime, most non-discretionary bonuses and commissions when computing a non-exempt employee’s overtime rate.

Non-discretionary bonuses and commissions are earnings that are tied to employee performance or production and are paid on a routine basis. For example, if an employee earns $20.00 per hour plus a bonus based on the employee’s performance or the performance of the company, the overtime rate is not simply 1.5 times or 2.0 times the employee’s $20.00 hourly rate. The bonus earned by the employee must be included in the calculation of the employee’s “regular rate of pay” for purposes of determining the overtime premium that was earned during the work hours in which the employee earned the bonus. Purely discretionary bonuses that are not tied to work or production, such as a holiday bonus, are not included when calculating overtime pay.

The Department of Labor publishes a helpful tutorial on how to calculate overtime pay when non-discretionary bonuses are earned. The Department of Labor’s tutorial may be found here https://www.dol.gov/WHD/StateandLocalGovernment/CA_Tutorial/media/OT%20Examples%20Final.htm (Note: The DOL’s examples reflect federal law.) Employers may also wish to consult an employment attorney regarding overtime rate calculations when they offer non-exempt employees bonuses or commissions, as these calculations are often complicated.

Colleen M. McCarthy, Esq. is a Partner and chairs the Firm’s Employment Practices Group. She has dedicated her practice to representing and protecting employers, with a particular emphasis on risk mitigation through preventative counseling and sound practical advice. For 15 years, Ms. McCarthy has counseled employers about the complicated employment laws that impact their businesses to ensure that they are in compliance, and to reduce the chance of costly litigation. Ms. McCarthy may be reached by phone at (949) 608-6900 or email cmccarthy@ferruzzo.com